First Reference Talks

Enforceable dismissal clauses

Author: Stuart Rudner

Posted on Thursday, August 5th, 2010 at 10:00

One crucial piece of advice that I offer to employers is to have every single employee sign an employment agreement that, if nothing else, sets out what will happen in the event of dismissal without cause.

The reason for this suggestion is simple: without a contractual dismissal provision, an employer’s obligations in the event of dismissal without cause are unpredictable and often extensive.

Employees in Canada are entitled to notice of termination or pay in lieu of the notice period. Statutory regimes in every jurisdiction set minimum periods of notice, and employers cannot contract out of them. In addition, the common law provides that all employees are entitled to “reasonable notice” of termination.

The statutory regimes define specific periods of notice based solely upon length of service, making it fairly easy to assess the notice an individual will be entitled to upon termination. The common law situation is quite different. The courts have deliberately avoided using a black and white formula to define “reasonable notice”. Rather, the courts aim to consider all relevant factors to assess how long it will take an individual to obtain new employment. The list of potential factors to consider is lengthy, but there are a few core factors, which include:

• Length of service
• Age of the employee
• Type of position held
• Availability of similar positions

In addition, if the terminating employer induced the employee to leave prior secure employment, that will be factored into the equation.

Thus, with respect to the common law, it is impossible to predict the amount of notice or pay in lieu to which a particular individual is entitled. Each case will be assessed on its own particular facts.

However, parties may contract out of the common-law requirement of reasonable notice. Employers and employees can avoid the guessing game that the common law imposes, and simply agree on how much notice, or pay in lieu, will be required in the event of dismissal without cause.

When I tell clients all of this, they often reply, “Okay, but will that really hold up in court?” The answer is yes, but with a caveat: the contractual term must be drafted properly, and the parties must properly agree to the contract itself.

The Ontario Court of Appeal recently considered a contractual notice provision in Clarke v. Insight Components (Canada) Inc. Clarke joined the organization in 1995. In 2000, the company introduced a policy that all employees at his level would be subject to the following provision:

“Your employment may be terminated without cause for any reason upon the provision of reasonable notice equal to the requirements of the applicable employment or labour standards legislation. By signing below, you agree that upon the receipt of your entitlements in accordance with this legislation, no further amounts will be due and payable to you whether under statute or common law.”

Subsequently, the plaintiff was offered a substantial promotion: Managing Director. He signed an agreement that set out the terms and conditions of his new position, including the termination provision above.

Ultimately, the plaintiff was dismissed, and the company sought to rely on the dismissal provision. The plaintiff argued that the provision was unenforceable. The trial judge rejected his arguments, and he appealed, raising several objections to the provision, including that:

• The clause was ambiguous and therefore unenforceable
• The termination provision was not supported by consideration and therefore not legally binding

The Court succinctly rejected both arguments.

Established law requires that, to be enforceable, contractual provisions must be clear and unambiguous. Courts will interpret ambiguous provisions in favour of employees. For these reasons, I work with clients to ensure that their contracts, and particularly the dismissal provisions they use in employments agreements, are as clear as possible.

Many organizations make the mistake of including superfluous language that inadvertently raises questions about the intention behind the provision. For example, rather than clearly stating that an employee will be entitled only to the amounts required by statute, and nothing else, they will draft something along these lines:

“In the event of dismissal without cause, the employee will receive at least the minimum notice required by employment standards legislation.”

It is certainly open to argument that this language does not preclude other entitlements. There is no reason to include the words “at least”.

In Clarke v. Insight Components, the employee argued that the words “reasonable notice” in the termination clause created ambiguity, as that term is typically associated with the common-law notice requirements. However, the last sentence of the clause clearly excluded any further entitlements under statute or common law.

As for the alleged lack of consideration, this is, in my view, one of the most frequent mistakes employers make in implementing employment agreements. The law of contracts is clear that in order to have a binding contract, each party must offer consideration to the other. This is what distinguishes a binding contract from a “mere promise”.

In many cases, employers make a verbal offer of employment to a candidate, and then present the new employee with a written agreement when they arrive for work. By that point, the initial verbal agreement is already in place, including any terms that the parties discussed and a multitude of statutory terms. Among the latter is the requirement to provide reasonable notice of dismissal. It is not easy to replace this verbal agreement with a more detailed written one.

To avoid this mistake, I advise clients to make the initial agreement the offer of employment, rather than the final contract. In other words, once they have decided to hire a particular individual, they can say, “We are happy to make an offer of employment to you in accordance with the terms and conditions set out in this agreement”. The employer can then provide the employee with a formal agreement and a timeframe to review it, seek legal advice and then sign and return it, preferably well in advance of the employee’s start date. If the agreement is not available at the time of the discussion, the employer can simply indicate that an offer of employment will be made in accordance with the terms and conditions of a forthcoming written agreement.

There are two major risks when attempting to impose new terms of employment on existing employees. First, if the employer offers no consideration, the new term may be unenforceable. Second, unilaterally changing the terms of the employment agreement or relationship can lead to a claim of constructive dismissal. In order to avoid a finding that they have constructively dismissed an employee, employers should consider negotiating the new terms in exchange for new consideration or providing appropriate notice of the change to the employment agreement.

In the Clarke case, the plaintiff argued that there was no consideration for the termination provision, which was adopted after the plaintiff had commenced his employment. However, the Court of Appeal found that when the new provision was introduced, “significant changes were made to the appellant’s remuneration package including some improvements”. In other words, he received some consideration. Therefore, the Court agreed that the termination provision was enforceable.

This is consistent with my recommendation to clients: that new terms of employment, such as a dismissal provision, be implemented at a time when the employee is offered something that they would not otherwise have received. This can include a promotion, a raise or a bonus, so long as these would not have happened automatically, in which case they are unlikely to be viewed as legitimate consideration.

The end result was that the company prevailed and the Court of Appeal found that the dismissal clause, first introduced by way of policy and then incorporated into the plaintiff’s contract when he was promoted, was enforceable.

Stuart Rudner, Miller Thomson LLP

Tags: clear and unambiguous, common law, consideration, Dismissal, employment agreement, employment contract, employment standards, inducement, reasonable notice, termination, termination without cause

This entry was posted on Thursday, August 5th, 2010 at 10:00 and is filed under Employment Standards, Human Resources. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.